Deutsche Börse has introduced a new order type on its Xetra
equities platform, which it claims will benefit buy-side market participants by
prioritising orders, resulting in narrower spreads.

The Top of Book order type has been included in Xetra 12.0, the
latest version of Deutsche Börse’s trading platform which was introduced in November
2011. By using the new order type, traders can ‘jump the queue’ and trade before
other participants – but only if their order reduces the spread of the Xetra
order book. If the order does not reduce the spread it is rejected.

On 1 March, Deutsche Börse will introduce a
price incentive for the new Top of Book order. In addition to the lower costs associated with narrower spreads, users will be credited by 0.2 basis points for each trade that closes the difference between the price at which buyers and sellers transact.

“We have introduced this order type because we want to
improve the quality of our marketplace,” Rainer Riess, managing director of
business development at Deutsche Börse, told theTRADEnews.com. “If an order
improves the spread, it will occur. If not, it won’t happen. This benefits
everyone across the whole market.”

While the primary users of the new order type are expected
to be market makers such as Getco, Citadel and other latency-sensitive firms willing to take risk by entering the market inside the spread, the option is available to any market participant.

“It is not important for us what kind of market participants
use this order type,” said Michael Krogmann, head of institutional equity in
the Xetra market development area. “Since by definition these trades can only
happen if they narrow the order book spread, every trade is good for the
market.”

Rees added that Deutsche Börse had explored other possibilities, such as the maker-taker pricing model commonly used at North American
exchanges, but the Top of Book order was a better solution since it “does
not reward behaviour that adds little to the market”.

Deutsche Börse is currently working to complete a merger
with exchange group NYSE Euronext. However, that merger looks increasingly
unlikely to take place, due to the opposition of the European Commission’s
antitrust investigation.